When Will The Stock Market Drop End?
"Will stock market volatility end" is a question I am asked frequently. When we go from a relatively calm period in the stock market to one with big swings, investors get concerned. Stock market uncertainty is difficult to stomach, even for the most seasoned investor (and their advisor). If you’ve paid attention to stock market history, it’s to be expected. Negative stock market corrections are as welcome as ants on a cupcake. Knowing how to cope is a real part of the process.
A Little History
I was a new advisor when the World Trade Center was attacked. Even though the market shut down for a week, we still went into a free fall. I remember thinking “what did I get myself into?”. Since the incident occurred shortly after the tech bubble burst, investors were more nervous than ever. Fortunately, the stock market rebounded after about 4 weeks to it’s pre World Trade Center (WTC) attack level.
Downturns are rarely a random event. Understanding the potential reasons behind negative market movements makes it a little easier to tolerate, and not panic. Research analysts believe 2022 is experiencing volatility for three major reasons:
- The war in the Ukraine
- Inflation and interest rates
- Lower sales, supply chain and earnings projections
can investors Protect Their Nest Egg?
Market volatility is unsettling, but historically not unusual. If your investment portfolio is appropriately diversified and aligns with your risk tolerance, it’s likely the recent market drop will be a mere blip in your long-term investing plan.
However, it can be hard to do nothing when markets are rough. Given what has been happening recently, consider these five common investing principles:
Don’t try to time the markets
It’s nearly impossible. Time in the market is what matters. While staying the course and continuing to invest even when markets dip may be hard on your nerves, it can be healthier for your portfolio and can result in greater accumulated wealth over time. Buying into investments while shares drop in price means you’re buying at a discount. Who doesn’t love a bargain?
Understand your tolerance for risk
Understanding your risk comfort level is essential to successful wealth building. Sometimes a market drop serves as a wake-up call that you’re not as comfortable with losses as you thought, or that a portfolio needs more diversification to spread out the risk.
Rebalance when appropriate
Market changes can skew your allocation from its original target. Over time, assets that have gained in value will account for more of your portfolio, while those that have declined will account for less. Rebalancing means selling positions that have become overweight in relation to the rest of your portfolio, and moving the proceeds to positions that have become underweight. It’s a good idea to do this at regular intervals.
Cash Can Be King
Build in protection against significant losses. Modest temporary losses are one thing, but recovery from significant losses can longer. Have a reserve of cash available inside accounts used for current lifestyle needs or short term goals.
Your cash position can be used to fund your needs and allow you to leave your investments in place, and not be forced to sell at a loss. When used for diversification, they can help buffer your portfolio against the effects of down markets.
Filter out the noise
It’s hard not to stay tuned to current events, especially when the news is available 24/7. After a while, tuning in is like watching a train wreck. Continue to live your life, and remember, this too shall pass. Today, for example, we have 100 years of market data to provide perspective. After every significant event, the market reacted, and eventually recovered and grew. Although historical performance is no guarantee of future results, the market patterns are interesting.
For example, any time I’ve seen a client sell out of the market, their losses were locked in, making it impossible to recover. Investors that weathered the storm were rewarded. Answers to your questions about your cash flow needs, investments, and risk tolerance are found in the financial planning and wealth coaching process. Together, we invest time on the front end to get answers to your pressing money questions. When a stock market correction happens, we are prepared.
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